May 12, 2011

Three Cheers for the Cheapeners and Cost-Cutters

... A feature of innovation is that the greatest impact of a new idea comes not when the light bulb goes on over the geek's head, but when the resulting technology eventually becomes cheap enough for many people to use—perhaps decades later. The first plane at Kitty Hawk had zero impact on the world economy, but budget airlines have a huge impact; the first computer was a curiosity, but cheap laptops changed the world.

With some technologies, the cheapening happens almost immediately. The Post-it note springs to mind. With others, the cheapening takes a surprisingly long time: Lasers remained the preserve of labs for five decades before suddenly showing up in consumer goods. With some technologies, like helicopters, the cheapening has never happened at all.

Most of us consider the original idea rare and noble, the later cheapening inevitable and dull. Who would imagine today that Napoleon III of France reserved his newfangled aluminum cutlery for only his most honored guests, leaving commoner folk to eat with silver?

We also disrespect the people who achieve the cheapening. The robber barons of the late 19th century generally made their fortunes by drastically cheapening new technologies, grabbing market share by undercutting rivals—and ending up with terrible reputations. Cornelius Vanderbilt cut the price of rail freight 90%, Andrew Carnegie slashed steel prices 75% and John D. Rockefeller cut oil prices 80% between 1870 and 1900. Malcom McLean, Sam Walton and Michael Dell did roughly the same for container shipping, discount retailing and home computing a century later, and were also unloved for it.

Yet it's the cheapening that raises the world's living standards. And cheapening is often mighty hard work. ...

There are two ways our standard of living improves. Our earnings rise and the cost of what we consume goes down. Walmart stores and big box stores drive prices down through their volume business model. This makes many of the things that would otherwise be affordable only for the upper-middle class available to those with lower incomes. For everyday goods, like food and clothing, Walmart has been so effective at keeping prices low that economists from across the political spectrum say that Walmart has been the single biggest contributor to the improving standard of living for the poor compared to all other contributors combined. Yes, there are losers. It typically is other small chain retailers (not mom and pop locally owned businesses). Yes, there can be a slight downward pressure on wages but the impact on the overall regional economy is negligable. The opening of a Walmart in a depressed neighborhood can also serve as an attraction for other businesses and services, leading to economic renewal. When a Walmart opens there are always far more applicants than jobs being offered. The greatest oppostion comes from unions and from upper class folks whose aesthetic sensibilities violated by the presence of such stores. Poor neighborhoods generally show 80-90% support for such retailers.

It is a bit maddening to hear people who say they side with the poor vilify the cheapeners as archenemy purveyors of consumerism. Without the cheapeners, the standard of living for the poor would be far worse and we would not have most of the goods we take for granted today (including the device on which you are reading this post) available to us.